Suter v. Goedert
| Decision Date | 16 October 2008 |
| Docket Number | No. 3:04-CV-00325-ECR-RAM.,3:04-CV-00325-ECR-RAM. |
| Citation | 396 B.R. 535 |
| Parties | In re Horace B. SUTER, Jr., Barbara J. Suter, Appellants, v. Warren GOEDERT, Erica Michaels Holander, and Bruce Matley, Appellees. |
| Court | U.S. District Court — District of Nevada |
Geoffrey L. Giles, Marie C. Mirch, Mirch & Mirch, Reno, NV, for Appellants.
Bruce T. Beesley, Tricia M. Darby, Lewis and Roca, LLP, Geoffrey L. Giles, Marie C. Mirch, Mirch & Mirch, Reno, NV, for Appellees.
This case comes to us on remand from the Ninth Circuit. In light of the long and complex history of the case, the Court held a hearing on September 29, 2008. We heard oral argument from both sides, and judgment was entered (# 55) on the same day. We now set forth in detail our analysis of the case, which was the basis for the entry of judgment.
We must determine whether the defendants in a pre-petition legal malpractice lawsuit may purchase that lawsuit from a trustee in bankruptcy when the plaintiffs file for bankruptcy protection. We conclude that they may.
Appellants Horace and Barbara Suter ("the Suters") institutionalized their daughter during her teenage years in the Truckee Meadows Hospital and Rehabilitation Center. The Suters believed their daughter was improperly treated during her stay at the facility and retained the law firm of Goedert & Michaels ("the Goedert firm," or "the defendants") to file suit against the institution and the attending physicians.
While at the rehabilitation center, the Suters' daughter's treating physician was a Dr. Tannenbaum. Tannenbaum allegedly used "Blow Hole Therapy" as a method of treatment, which consisted of removing a patient's undergarments and blowing puffs of air into the patient's rectal area. At the time of the lawsuit against the physicians, the Suters did not know that this treatment technique was used on their daughter. Further, the Goedert firm did not depose Dr. Howle, the chief of staff of the hospital, or find out about the treatment during discovery.
Unbeknownst to the Suters, their attorney, Defendant Bruce Matley, was a patient of Howle. Matley did not disclose this to the Suters. Matley did, however, send a thank-you letter to Howle around the time the litigation started, which expressed his gratitude for Howle's services and informed Howle that he could no longer be Howle's patient.
The Suters settled their lawsuit with the institution, but continued on with their case against the individual physicians to trial. The attending physicians asserted counterclaims against the Suters. The physicians were successful with their counterclaims and obtained a state court award of approximately $200,000 at trial.1
After losing on their counterclaims, the Suters learned of Matley's relationship with Howle and commenced a malpractice action against the firm. On a motion for summary judgment, the state court found in favor of the Goedert firm. The Suters filed a motion for reconsideration, which was denied. The Suters then appealed the decision to the Nevada Supreme Court.
While the appeal to the Nevada Supreme Court was pending, the Suters filed for Chapter 7 bankruptcy protection on September 19, 2003, in light of the judgment against them. Their counsel informed them that they would not lose their cause of action against the Goedert firm if they filed for bankruptcy protection. The Suters listed the malpractice action as an asset on their bankruptcy schedules, but they did not claim an exemption for it.
Counsel for the Goedert firm learned of the bankruptcy proceeding, contacted the Trustee in Bankruptcy, Ms. Angelique Clark, and offered to pay $10,000 to settle the lawsuit. The Suters learned of the offer to the trustee and borrowed $10,000 from one of Barbara Suter's parents. (Bankr.Ct. Hearing Trans. April 14, 2004, at 20.) The Suters then offered to buy back the lawsuit asset from the trustee for $10,000. The trustee agreed to compromise the claim with the Suters, subject to the approval of the bankruptcy court, for "ten thousand dollars or for such other greater amount that may be offered" at a hearing on the matter. (Id. at 14.) On February 18, 2004, the trustee filed a Motion Authorizing the Release of the Estate's Interest in a Personal Litigation Suit with the bankruptcy court. A hearing for the motion was set for April 14, 2004.2
At the April 14 hearing, representatives for the Goedert firm were also present. The firm offered the trustee $11,000 for the malpractice cause of action. The lawyers in the firm, of course, were also the defendants in the lawsuit. By settling the lawsuit, the Goedert firm would not need to worry about any potential future judgment. The Suters offered to match the $11,000 offer, even though they had made arrangements to borrow only $10,000. The Goedert firm then offered $15,000 for the lawsuit, or $12,500 in the event the Suters appealed the Goedert's purchase.
Faced with two offers, the trustee opted to accept the Goedert firm's offer, determining that the Goedert offer was in the best interest of the estate's creditors. The Suters' attorney for their malpractice action alleges that he was never contacted by the trustee to determine the potential value of the underlying suit, which the attorney put at in excess of $1 million. Regardless, the bankruptcy court entered an order accepting the transfer of the Suters' lawsuit to the Goedert firm on May 14, 2004.3
Once the Goedert firm gained control of the lawsuit, the firm and the trustee executed a stipulation on May 19, 2004, in which the trustee agreed to dismiss the appeal pending before the Nevada Supreme Court. On May 24, 2004, the Suters filed a notice of appeal regarding the order granting the release of the suit with the bankruptcy court. On May 25, 2004, the Suters filed a motion for stay pending appeal. The Nevada Supreme Court granted the Goedert and trustee stipulation and dismissed the appeal on June 9, 2004. On June 14, 2004, the Goedert firm filed its response to the motion to stay before the bankruptcy court, arguing that the motion was moot in light of the Nevada Supreme Court's dismissal. On July 26, 2004, the bankruptcy court denied the motion for stay pending appeal, reasoning that the stay was moot in light of the Supreme Court's dismissal. Alternatively, the bankruptcy court determined that the trustee acted in accordance with the best interest of the estate and the estate's creditors.
The bankruptcy court's decision was appealed to this Court, and we dismissed the appeal on the basis of mootness. That decision was appealed to the Ninth Circuit, which reversed. The Ninth Circuit concluded that the Suters could revive their appeal before the Nevada Supreme Court by filing a motion for an extraordinary writ. The Ninth Circuit then remanded the case to this Court to "hear the Suters' appeal on the merits." Suter v. Goedert, 504 F.3d 982, 991 (9th Cir.2007).
We review the bankruptcy court's findings of fact under the "clearly erroneous" standard and its conclusions of law de novo. (In re Global W. Dev. Corp.) Global W. Dev. Corp. v. N. Orange County Credit Svc., Inc., 759 F.2d 724, 726 (9th Cir.1985). Whether an asset is property of the estate is reviewed de novo. Cisneros v. Kim (In re Kim), 257 B.R. 680, 684 (9th Cir.BAP2000); see Hanf v. Summers (In re Summers), 332 F.3d 1240, 1242 (9th Cir.2003).
The bankruptcy court's decision to approve a compromise is reviewed for an abuse of discretion. Martin v. Kane (In re A&C Props.), 784 F.2d 1377, 1380 (9th Cir.1986). Under an abuse of discretion standard, this Court will not reverse the bankruptcy court's decision unless we have a firm conviction that the court "committed a clear error of judgment in the conclusion it reached...." Marx v. Loral Corp., 87 F.3d 1049, 1054 (9th Cir.1996).
Two issues need to be decided: (1) whether the legal malpractice lawsuit was property of the estate; and (2) if so, did the bankruptcy court abuse its discretion in confirming the sale or compromise of the claim to the Goedert firm?
When a bankruptcy petition is filed, an "estate" is created, consisting of all of the debtor's interests, both legal and equitable, in all property, both tangible and intangible. 11 U.S.C. § 541(a); Hillis Motors, Inc. v. Hawaii Auto. Dealers' Ass'n, 997 F.2d 581, 585 (9th Cir.1993); In re Burgess, 234 B.R. 793, 795-96 (D.Nev. 1999). Thereafter, the property of the estate is distinct from the property of the debtor. Property acquired post-petition by the debtor does not enter the estate; it remains the separate property of the debtor. See ALAN N. RESNICK & HENRY J. SOMMER, 5 COLLIER ON BANKRUPTCY ¶ 541.03 (15th ed.1996) (hereinafter "COLLIER ON BANKRUPTCY") ("In general, property ... subsequently acquired by the debtor does not become property of the estate, but rather, becomes the debtor's personal property, clear of all claims that are ultimately discharged in the bankruptcy case.") (footnotes omitted). Although "property" is not defined in the Bankruptcy Code, it has been interpreted liberally in order to further the policies underlying the bankruptcy laws. See United States v. Whiting Pools, Inc., 462 U.S. 198, 202-04, 204, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) ().
The Suters did not claim the legal malpractice action as an exemption on their schedules when they filed their bankruptcy petition. Nevertheless, they argue that they could have exempted the action as a personal injury action. Alternatively, the Suters contend that the cause of action should be excluded from the bankruptcy estate on public policy grounds.
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